Local office building sales plunge

(Crain's) -- Office building sales in the Chicago area have plummeted this year, as tighter lending standards along with uncertainty over the economy have ground the market to a virtual halt.

(Crain's) -- Office building sales in the Chicago area have plummeted this year, as tighter lending standards along with uncertainty over the economy have ground the market to a virtual halt.

For the first nine months of the year, it's projected that just 12 large office buildings will be sold throughout the suburbs and downtown, for a total volume of $1.24 billion, according to Jones Lang LaSalle Inc.

In the year-ago period, 51 buildings sold for $5.7 billion, Jones Lang says.

"I can't remember a time when the transaction volume has been as low," says James Postweiler, a managing director in the capital markets group for Chicago-based Jones Lang. "There's just a big gap between what buyers and sellers perceive is the right price."

Mr. Postweiler says he expects sales activity to remain stagnant into next year. He hopes things will improve in 2009, once the firms hit hardest by their subprime mortgage activity take their lumps -- like Lehman Brothers Holdings Inc.'s bankruptcy filing and Merrill Lynch & Co.'s hastily arranged deal to be bought by Bank of America Corp.

The buyer-seller disconnect is in large part a fallout of the credit crunch. Buyers can now get loans only for 50% to 65% of their price, compared with the 80% loan-to-value deals that were standard a couple of years ago. In addition, lenders are now assigning lower value to unleased office space, says Mr. Postweiler, and have cut their expectations of future rent increases due partly to concerns about economic growth.

"With debt markets now, the loans are forcing buyers to pay a lower price if they want to get the same return," Mr. Postweiler says. "So when buyers pencil that out, sellers see that as a huge decline in value."

Mr. Postweiler estimates that prices have fallen 10% to 30% over the past year to 18 months.

Almost 20 local office properties have been pulled off the market this year. In most cases, there are buyers interested, but they're offering prices too low for sellers to swallow. And since leasing activity has held up, Mr. Postweiler says, many owners don't feel pressured to accept low offers.

In one such instance, Jackson, Miss.-based Parkway Properties Inc. pulled its two East Loop towers, 111 E. Wacker Drive and 233 N. Michigan Ave., off the market. Parkway last fall tried to find a buyer that would take a 70% to 75% joint-venture stake in the two buildings, which are part of the Illinois Center complex, and couldn't get the price or structure the firm wanted.

"We did get offers, but not offers that we felt were acceptable," says Will Flatt, Parkway's chief operating officer. "We probably did get caught up in the financial crisis."